For several years, the Climate Concept Foundation (CCF) investigated into fraudulent practices in the development of international emission reduction projects. Successfully so! We managed to provide evidence for significant malpractice in emissions trading. The UNFCCC Secretariat now decided to act on our substantiated claims put an end to these abusive practices.

Enormous environmental harm

The annual extent of environmental harm caused is substantial due to several million carbon credits obtained by fraudulently acting project participants The blagged issuance of these credits puts an additional toll on Earth’s atmosphere. A few dubious companies exploited a flaw in the regulations with regard to a specific type of emission reduction projects: nitrous oxide reduction in nitric acid production facilities. These plants are used for fertilizer production. There are several hundreds of them around the globe. And their number is growing.

No contradiction

From an environmental perspective, nitric acid plants are gross polluters. However, exactly this is why they are very suitable for implementing emission reduction projects under the “Clean Development Mechanism” – so called CDM-projects – and apply to the UNFCCC Secretariat for carbon credits for emission reductions achieved.
Seemingly paradox at first glance, the reasons for this become apparent upon taking a closer look: these plants cause high emissions – this is why their potential to reduce emissions also is high. Because by implementing technological improvements, emissions of climate affecting nitrous oxide (N2O) can be reduced by up to 98%. This is a significant benefit and justifies investment in technology.
Until recently, nitrous oxide abatement at nitric acid plants has been a show case for CDM projects making use of the incentives set by the Kyoto Protocol rules.

The dirty truth

Unfortunately, plant operators around the globe have taken advantage of the incentive system and have been applying successfully for more carbon credits than they should be entitled to. They intentionally register their projects using out-of-date technology that is less economic than the state-of-the-art in order to maximize returns from the sale of carbon credits.
Contrary to the competition not making use of the CDM, who is continuously optimizing plant operational standards, the CDM plant operators did not follow the pace of technological advancement. Normally, operators try to limit nitrous oxide (N2O) formation in their operational process regardless of environmental concerns, because N2O is formed in an undesirable side reaction which reduces the yield of nitric acid, the basis for manufacturing fertilizers. This is why any plant operator would usually pursue to keep the N2O content in the plant’s off-gases as low as possible.

Void of environmental conscience

N2O reduction technology in nitric acid production

The situation is different if a plant operator decides to implement a CDM project at his plant: in such case, the amount of N2O emission reductions achievable is essential for earning carbon credits. Initially, it is therefore advantageous to have high emissions. A high N2O-content in a plant’s off-gas allows reducing the absolute amount of N2O emitted within a CDM project activity, enabling the operator to claim more carbon credits.
Some CDM plant operators therefore consciously use out-dated technology, although industry competition pushes them to implement the state of the art. Due to their technology’s relative inefficiency, they should actually earn less than competitors not taking part in the CDM. Only theoretically so. Because of the additional income from the sale of carbon credits they end up being better off – although producing less efficiently. And the more N2O is formed in their plant’s production process, the more they can reduce and earn carbon credits.
Carbon credits can be sold at a profit. But any carbon credit that is issued can be used for justifying emissions in another place. If carbon credits are being issued in spite of no emission reductions having been achieved, this entails environmentally harmful surplus emissions. Or in other words, such certificates allow additional emissions to take place without in turn having delivered emission reductions beforehand.
In consequence, Earth’s atmosphere is burdened with additional greenhouse gas emissions equal to the amount of certificates erroneously issued. Out of 500 to 600 nitric acid plants in operation world wide, for more than 100 a CDM project has been registered. The currently often observable fraudulent practice causes significant environmental harm.

Dilligent Research

Calculating emission reductions achieved by such CDM projects is a complex task and hard to understand for laypersons.
Until some years ago, only a small group of insiders had knowledge about the doubtful practices. True insight is exclusive to the project participants who implement a specific project and profit from it. External auditors are hired and paid by the project participants. Sometimes, there has been reason to believe that their evaluations heed the financial interests of their client above those of climate protection.
The Climate Concept Foundation investigated closely, collected lots of data and made a well substantiated submission to the United Nations’ Climate Change Secretariat. The evidence brought forth by us has convinced the UNFCCC methodology experts right away, who recommended to put these projects on hold and investigate further into the matter.

Successful, but only at first glance?

The Climate Concept Foundation’s work seemed to have paid off at first glance: correcting the current practice should result in about half a million certificates less per year issued to the nitric acid CDM projects. The avoided amount of surplus emissions would be equal to those of driving a car 5600 times around the equator.

On second glance?

But looking at the revised regulations, it becomes apparent that the Executive Board to the CDM (CDM EB) did not fully implement the revisions recommended by the methodology experts in due consequence. Instead, the UN decision makers primarily took into account the project participants’ commercial interests .
In order to avoid a scandal, the CDM EB had to react. They could not just ignore the expert recommendations, but they did not follow through on them when revising the applicable regulations. The modifications applied were half-hearted. That new technologies could mean lower emissions in future has in principle been reflected in the methodologies, because they now make the use of default values mandatory for the calculation of emission reductions achieved by a project. But these default values are far too high. Although they are lowered step by step over time to reflect further technological advancement, they are ridiculously high in absolute terms. Only by 2030 will this degression over time lead to values that adequately reflect the technological state of the art as it is today.
In conclusion: the half-hearted correction of the methodological framework will continue to allow the issuance of surplus credits.

What remains

The decline of carbon markets since 2009 resulting in this kind of project no longer being economically attractive. This is why no new nitric acid projects are being registered and many already registered projects are no longer operational.
Due to external circumstances, the lack in regulatory rigor caused by the slack revision currently does no harm. Nevertheless, the Executive Board should have lived up to its responsibility and provide for appropriate default values to be used for the calculations on a mandatory basis.
This problem may become relevant once more in case carbon markets experience a revival towards the end of the present decade.

A clear focus on climate change mitigation

Unfortunately, the project type “nitrous oxide reduction in nitric acid plants” is no maverick case. There are many emission reduction projects out there of dubious quality that deliver on the expectations of the project development sector rather than on the environment. That is why audits by truly independent auditors remain important.
The Climate Concept Foundation will keep an eye on this. Although emissions trading presently is struggling for survival, we consider it as a sound instrument to reduce emissions on a global scale. Even N2O reduction in nitric acid plants could mature into a showcase for the CDM, but only if implemented in an environmentally sound manner.